The sell-out rate on Prague’s market in new apartments is nearing a critical point, with prices still on the rise.

Deloitte Develop Index

Deloitte Develop Index: The price per m2 has crossed the threshold of CZK 90 thousand for the first time in Prague. The number of new apartments is the lowest in 4 years. Supply primarily includes smaller but more expensive projects in the city centre.

Prague, 19 June 2017 – Despite the fact that spring has so far been the main season for developers, the sell-out rate in the capital keeps growing. While sales of apartments used to be the highest in the period, this year’s figure has been the lowest in recent years. What is more, the number of newly offered apartments which will be available in the foreseeable future is declining.

“In the long-term, it is evident that the problem on Prague’s real estate market is due to low supply rather than high demand. In fact, demand has dropped almost by 20% year-on-year compared to the same period in 2016. Nevertheless, even a decline in demand cannot balance out the substantial drop in supply,” remarks Petr Hána, Manager at Deloitte’s Real Estate department.

Inevitably, the offer prices of available apartments keep growing as a result, which is persistent namely on account of three reasons:

New smaller and cheaper apartments are sold very fast whereas larger and more expensive apartments are left on the market.

New projects are getting more expensive every month.

A greater number of smaller but more expensive projects are entering the market in the city centre, and much fewer cheaper ones which used to be developed as large units in Prague’s suburbs.

The combination of these factors thus causes total average prices to be constantly on the rise. According to the latest Deloitte Develop Index, which analysed data from Prague’s real estate market for March and April 2017, the average offer price for new available apartments increased by another 2.1% to CZK 90,400 per m2, making it the first time the price per m2in Prague had crossed the 90-thousand threshold.

“The sell-out rate of the entire market is currently nearing critical levels. This March and April, 25% fewer new apartments were placed on offer compared to last year and 40% fewer than the year before. May was even worse in this regard. At present, only 738 finished apartments are available in the whole Prague, and 2,000 are under construction and will be finished in one or two years. In estimate, 1,337 apartments which are still on paper will have been completed in two years,” explains Milan Roček, statutory executive of the www.CenovaMapa.org portal, which monitors and analyses development of the apartment market in the long-term.

The high sell-out rate applies namely to small apartments. Although more than 170 apartment projects comprising over 10,000 apartments are currently being built or prepared for construction, the vast majority of small apartments have already been sold. There are 482 one-bedroom apartments available and 1,191 two-bedroom ones. Half of these will be finalised one year from now at the earliest and the other half no earlier than two years from now. Taking into account the available apartments in finalised projects, 85% of the market in one-bedroom apartments has been sold out and so has 78% of the market in two-bedroom apartments.

“Unfortunately, improvement or change in the trend is unlikely in the coming months or even years as, for example, the number of construction permits awarded to new apartments last year was the lowest in 20 years – only 1,304. Therefore, another long-term problem is the highly complex legislative process making it impossible for developers to flexibly respond to demand, which, in recent years, has been primarily driven by natural socio-economic and demographic developments,” adds Petr Hána.

The record sell-out rate signals another price increase

Tomáš Pardubický, CEO of FINEP, and Tomáš Kadeřábek, Director of the Developers’ Association, comment on the current situation as follows:

Tomáš Pardubický, CEO of FINEP: “Apartments will be unavailable even to the middle class, which has unfortunately already started to manifest itself these days. It is a very bad signal for the city’s development as the economy is driven by the middle class. Unless the approach changes substantially, the real estate market will respond to the situation by a major increase in prices. At present, Prague’s situation will not be changed by planned construction of rental apartments. The reason being that these days it takes five and more years to implement residential projects due to the lengthy approval process. The only way of sustaining future secure price growth and supply of available apartments that corresponds to demand and the expected demographic curve is through a major increase in permits awarded to new residential projects.”

The demographic developments and the long-term change in life style have increased people’s need to live in cities, namely those of young and productive age. How should Prague respond?

Tomáš Kadeřábek, Director of the Developers’ Association: “People moving from the country to cities is not only a matter of the Czech Republic, or Prague. The situation is similar across Europe. We should draw inspiration from cities such as London, Paris or Vienna in how to actively respond to demographic developments, namely by clearly defining the areas intended for construction, by preparing them, and by involving the city’s representatives in the whole process. If you want to have young, active and productive people in the city, you need to make it possible for them to live where they want to work. Active construction of the necessary residential capacities has another positive aspect, which is the pressure of competition on real estate prices. Developing the city or individual locations should form an inseparable part of city management, and the city itself should take an active part in constructing new apartments for its citizens – in other words, to be the developer.”

About the Deloitte Develop index

The Deloitte Develop index monitors the qualitative and quantitative indicators of supply and demand on Prague’s development market processed by the www.CenovaMapa.org portal. Its task is to describe, on a bi-monthly basis, the current state of the residential market and its development. The set of indicators is based solely on declaratory information obtained from the websites of individual development companies and pricelists of development projects. The basis of the index is formed by the numbers and proposed prices of vacant units under development projects towards the end of the monitored period.

Deloitte Develop Index is implemented with support of the Association of Developers.

Deloitte refers to one or more entities of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/cz/about to learn more about our global network of member firms.